§7. Interest as a Cost

From the foregoing criticisms and discussion it will, I hope, be seen that I have given full recognition, in this book, to the elements of productivity, technique of production, and cost, and that my chief objections to their treatment by many other writers is either that their treatment is inadequate and leaves the problem of interest indeterminate, or simply that they do not reduce the problem to its simplest terms.

In particular, it has been noted that the ultimate economic cost is labor and that all money payments and industrial operations intervening between labor and satisfactions may, in the large view, be dropped out. I have endeavored, in this and in other ways, to articulate the theory of interest with sound accounting principles, even when no great damage would be done to interest theory, as such, if unsound accounting were allowed to enter.

The most flagrant case of unsound accounting injected into this discussion is, in my opinion, when waiting is regarded as a cost.

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This grows out of the common tendency to account for all economic values in terms of cost. When we cannot find the cost, we invent it. We feel sure interest must be fully accounted for in terms of cost. When we find inadequate the cost of producing capital or the cost of managing it or of organizing it or of investing it, we fall back on waiting, abstinence, or labor of saving.

It is true that these words are used by some writers to mean nothing more than what I have included in the phrase impatience or time preference. In these cases the question is merely one of terminology. In a large number of instances, however, the abstinence or waiting theory seems to me to differ from the impatience theory not only in words but in essence. In this the assumption is made that abstinence or waiting exists as an independent item in the cost of production, to be added to the other costs and to be treated in all ways like them.

If abstinence or waiting or labor of saving is in any sense a cost, it is certainly a cost in a very different sense from all other items which have previously been considered as costs. An illustration will make clear the difference between true costs and the purely fictitious or invented cost of waiting. According to the theory that waiting is a cost, if planting a sapling costs $1 worth of labor, and in 25 years, without further expenditure of labor, or any other cost whatever (except waiting) this sapling becomes worth $3, this $3 is a mere equivalent for the entire cost of producing the tree. The items in this cost are, it is claimed, $1 worth of labor and $2 worth of waiting.

According to the theory of the present book, however, the cost of producing the tree is the $1 worth of labor, and nothing more. The value of the tree, $3, exceeds that cost by a surplus of $2, the existence of which as interest Edition: current; Page: [487] it is our business to explain. Labor cost and waiting are too radically different to be grouped together as though each were a cost in the same sense as the other.

The cost of waiting can neither be located in time, independently of the item waited for, nor can it, like any other item, be discounted, for it is itself the discounting. If we discount the discounting, we would have to discount the discounting of the discounting and repeat the process indefinitely.

If we insist on calling waiting or abstinence a cost we reduce to absurdity all our economic accounting. Among other things, the simplest, purest type of income, a perpetual annuity, will be found, by such accounting, to be no income at all.

An able critic and correspondent, after admitting this fact, says simply, "What of it?"

Well, perhaps nothing vital as to the theory of interest itself. And since that is, after all, the sole subject of this book I shall relegate to the Appendix the discussion of What of it? as to accounting.113